Large firms can be slow to respond to changing market conditions and customer needs

How can firms use economies of scale?

Be passed onto the customers in the form of lower prices which encourages sales

Used to raise profit margins to finance investments in R&D, new equipment or staff etc...

What advantage do large firms enjoy over small firms?

Large firms can exploit economies of scale and enjoy lower unit costs. This means they maintain higher profit margins or charge lower prices than small firms producing identical products.

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Economies and diseconomies of scale

How can small firms compete with large firms in the same industry?

Economies of scale means small firms cannot compete with large firms on costs. Many small firms opt for product differentiation and sell a premium good or a service whose high quality and exclusivity justifies its high price.

Targeting a niche or local market, too small to interest a large firm (high priced products for high income consumers)

Differentiated product whos quality justifies its high price

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Economies and diseconomies of scale

List 3 problems small businesses face in the early years

Gaining customers- few customers to generate revenue and cover costs

Raising finance

Owners may find the responsibility and uncertainty of ownership and management too stressful

List 9 reasons why small firms fail in the first year

Inadequate market research- fails to identify customer needs

Insufficient demand- to sell a quantity that covers costs and makes a profit

Inadequate financial planning- overtrading/cash flow problems

Overtrading- where firms expand without having secured funds to finance growth

Bad management- failure to keep records or a mistake in the desing of a product

Market share- takes time to build market share

Changes in external factors- unexpected economic downturn

Competition- larger firsms use market power and economies of scale to set low prices

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Legal structure

Define the term legal identity

Refers to the status of a person, or business in the eyes of the law

What is an unincorporatd business?

Has no separate, independent legal identity. The law sees the owner and the business as the same entity (sole trader or partnership)

What is an incorporated business?

Has its own legal status- can own property, sign contracts and take legal action in its own name (Ltd private limited companies, PLCs public limited companies and LLPs, limited liability partnerships

Define liquidation

Is the process by which a company is ended. All assets are sold and debts paid. Any remaining funds are returned to the shareholders

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Legal structure

What happens if after liquidation, some creditors remain unpaid?

Final responsibility for paying off any outstanding debts of a business depends upon its legal status. Owners of unincorporated businesses have unlimited liability and may have to sell personal posessions. Shareholders are not responsible for any company debts- their personal assets are safe

Define liability

The legal obligation to pay a debt

Define liabilities

Total amount of all outstanding debts owed to creditors

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Unincorporated businesses

What is a sole trader?

A sole trader is a personal business owned by one person

How are sole traders established in law?

No legal formalities needed to set up as a sole trader- sole traders must inform tax authorities they are trading

List 3 advantages of being a sole trader

Easy to set up

Owner has complete control- makes their own decisions

All profits are kepy by the sole trader

List 3 disadvantages of being a sole trader

Owner is personally responsible for any debts incurred in trading

Hard to take time off work

Hard to raise finance

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Unincorporated businesses

Can sole traders issue shares?

No, only comapnies can issue shares

What is an ordinary partnership?

Business jointly owned

Run by 2-20 people

How are partnerships established in law?

No legal formalities need to set up- tax authorities must be informed

What is a deed of partnership?

A deed of partnership is a legal document setting out in writing how partners are to share future profits, responsibilities and working hours

Why do sole traders take partners?

To share responsibility and introduce expertise and capital

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Unincorporated businesses

Give 3 disadvantages of partnerships

Each partner is personally part responsible for any debts incurred

May disagree with decision making

Each partner is liable for each others actions

Explain unlimited liability

Owners have unlimited liability when they are personally responsible for debts of a business, even if they must sell their own personal possessions (sole traders and partnerships)

Explain limited liability

Owners have limited liability when responsiblity of the debts of a business is restricted to the amount of their investment in the firm. Owners are not required to sell their personal possessions. Shareholders in limited compaies have limited liability

Incorporated businesses

A private limited company: shares do not trade on public exchanges and cannot be advertised for sale

A public limited company: is a company with at least £50,000 of share capital- shares can be advertised for sale to the general public and trade on public exchanges

Define a company

A company is with its own legal identity and owned by shareholders. Sole traders and partnerships are not companies

What are limited liability partnerships?

A limited liability partnership has its own legal identity, general partners who manage the business and limited partners who are typically passive investors. All partners have limited liability and provide capital

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Incorporated businesses

What are shares?

A share is a certificate that represents a part ownership of the company. Each share gives the right to one vote at any shareholder meeting and part of any profits distributed to shareholders called a dividend (profit payment)

Explain share capital

Share capital is the total amount of money invested in a company by its owners. The funds raised from selling shares helps finance the business.

Give 2 risk involved in a share ownership

Performs badly- dividends may not be paid

Goes into liquidation- shareholders lose money invested in company shares

Who controls a company?

Each share allows one vote and pays one dividend. Each year the shareholders elect a chairman and a board of directors who control everyday running of the firm.

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Incorporated businesses

Who controls a business?

Control refers to responsibility for day to day running of a firm. Sole traders and partnerships are controlled by owners who usually act as managers. Limited companies are controlled by a chairman and board of directors elected every year by the shareholders at an annual general meeting (AGM)

What is a controlling interest?

One person or organisation has absolute control of a company if they own more than 50% of shares

Why choose to be a limited company and not partnership?

Shareholders have limited liability in a company and are only risking the amount invested in the company and not their personal assets. Partners with unlimited liability risk personal assets.

Define a public limited company (PLC)

Owned by shareholders who shares can be bought and sold on the stock exchange. It has legal personality, is able to own property and to sue and be sued in its own na,e

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Incorporated businesses

List 5 characteristics of a private limited company

Name: Ltd

Cannot advertise shares for general sale

Share transfers may be restricted

Share capital: no minimum

Simple account requirements

List 5 characteristics of a public limited company

Name: Plc

Can advertise its shares for sale to anyone

Shares can be sold to anyone

Share capital: at least £50,000

More detail required by law (accounts)

Can Ltd's keep their accounts secret?

No. By law, companies, both Ltd and Plc must send their annual accounts to Companies House

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Incorporated businesses

What is a floatation?

Is the process of offering new shares in a new plc to members of the general public. The cost of floatations are high but significant funds can be raised.

What 5 factors do owners take into account before become a Plc?

Loss of control: floatation involves giving up part ownership of the company

Cost of floatation: issuing a prospectus and offering shares for sales is expensive

Is the price for offered shares, sufficient to justify loss of ownership and control?

Owners' objectives- do they want to expand?

Alternative source of finances- how much is needed?

Give 4 reasons for converting from private to public limited company status

Offer shares to general public means more capital can be raised

More capital allows the firm to expand

Expansion allows access to economies of scale

This leads to improved competitiveness

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Incorporated businesses

What is a floatation?

Is the process of offering new shares in a new plc to members of the general public. The cost of floatations are high but significant funds can be raised.

What 5 factors do owners take into account before become a Plc?

Loss of control: floatation involves giving up part ownership of the company

Cost of floatation: issuing a prospectus and offering shares for sales is expensive

Is the price for offered shares, sufficient to justify loss of ownership and control?

Owners' objectives- do they want to expand?

Alternative source of finances- how much is needed?

Give 4 reasons for converting from private to public limited company status

Offer shares to general public means more capital can be raised

More capital allows the firm to expand

Expansion allows access to economies of scale

This leads to improved competitiveness

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Incorporated businesses

What is a rights issue?

A rights issue is an issue of new shares for cash to existing shareholders in proportion to their existing holdings and is a way of raising new finance from existing shareholders- an important source of new equity funding for plcs

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Franchising

What is a franchise?

The licence to sell a branded product created by another business

Who is a franchisee?

A franchisee is the entrepreneur buying the right to use a franchise and sell products supplied by the franchisor. The franchisee manages the business

Who is a franchisor?

A franchisor is the business selling the licence to use its name and products to other firms. The franchisor is inviting another business to set up a new branch

Give 3 reasons as to why you would become a franchisee

'Tried and tested' brand- reduces risk

National advertising

Training and advice given by franchisor

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Franchising

How can a franchise reduce risk?

A tried and tested brand- increases the chance of early sales as customers are familiar with the brand

List 3 drawbacks of a franchise to the franchisee

Franchisee pays a fee for the franchise

Cost of fitting out the shop

% of future sales called royalty

Why sell franchises?

Firms can rollout a string of high street shops without having to find the capital for shop premises, fixtures, fittings and staff. Each branch is managed by motivated individuals who have invested in the franchise. Franchises pay a royalty on sales and there are opportunities for economies of scale.

What are royalties?

A royalty payment made for the use of property, e.g a business name and is percentage of profit or turnover. Franchisees pay franchisors royalties.

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Ownership

What is the private sector?

Made up of households and firms controlled by private individuals

What is the public sector?

Made up of the central government in London, local government and firms controlled by the state

What is a mixed economy?

Has a private and public sector

What are the objectives of firms in the public service?

Aim to offer the best possible service to society. They do not act to maximise business profits

Explain privatisation

Is the sale of state-owned firms to the private sector

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Ownership

List 2 advantages of privatisation

Firms operate more efficiently

Profit motive and competition, force firms to make best use of resources and provide customers with products that match their requirements

List a disadvantage of privatisation

Unprofitable servies may no longer be provided e.g late night bus services

What is nationalisation?

The sale of state-owned firms to the private sector

List 4 ways the government support business activity

Providing public services

Passing laws and regulations

Offering subsidies and grants

Providing advice, information, suport and training opportunities for business